Trade & the Economy

The risk profile of the market has changed with stock & bond valuations reaching all-time highs, inflation on the rise, and our national debt passing $30 trillion. The Federal Reserve has begun removing stimulus by tapering their treasury and mortgage bond purchases and has signaled they will raise interest rates as soon a March to fight inflation. Meanwhile US foreign policy towards China will likely prolong supply chain problems which is already hurting growth. Adding to this economic tsunami is the “Catch 22” the Fed must confront tackling inflation by raising interest rates which is another higher cost for businesses and consumers alike and the higher rates both increase government debt servicing costs and slow economic growth.

Rightsizing domestic wealth inequality requires Demand-side monetary and fiscal policies, but the long-term remedy is to re-balance production and consumption practices in international trade which have hollowed-out our industrial and manufacturing capabilities. Time, capital, and multinational collaboration are necessary to meet this challenge particularly given the already massive debt levels among nations following the Great Financial Crisis in the West and the Covid pandemic worldwide. Re- balancing trade will broaden income and wealth distribution creating more for everyone.

While the best-case scenario is to run a “hot economy” so real interest rates remain negative and inflation gradually deflates the national debt, there is an interconnectedness of monetary policy with trade and politics. The bottom line is that the US can no longer be the consumption engine of the world. We must pass the mantel of consumption from North America to Asia and the Middle East. Foreign policy must acknowledge Demographic realities and the need to be a seller (exporter) not a buyer (importer) running continuous international trade deficits.

Presently these factors aggregate to offer a downward-biased, Reward-for-Risk market opportunity. It will reverse by a market correction or with greater growth and earnings. Given the current geo-political environment and the fact this is a mid-term election year, we are cautiously opportunistic knowing infrastructure spending is on its way and all hands are on deck at the Federal Reserve to pilot an expansive economy.

Late last year we found opportunities in the energy, materials, financial, and healthcare sectors primarily, but also occasionally in specialty technologies. This year we remain overweighted in stocks with side-lined cash we will put to work as favorable opportunities arise. While the present environment is not conducive to a buy the market strategy because balance sheets and earnings really matter, we do believe quality at the right price prevails over the long term so as we find it, we buy it. We remain overweighted in stocks with side-lined cash we will put to work as favorable opportunities arise.

Our process is time-tested and disciplined. Our goal is to compound money which also means being vigilant to watch portfolios and take corrective action to combat market loss. It’ a is fact-based methodology, utilizing real time data, both qualitative and quantitative—one that is opportunistic yet driven by risk management centered on time- tested financial principles.

In conclusion, we expect a volatile market in the first half 2022 peppered with staggered opportunities as uncertainty ebbs and flows. The second half of the year will pivot on the Fed’s ability to combat inflation limiting the increase in interest rates to no more than 4.0%-4.25% on 30-year mortgages. This additionally assumes international tensions with Russia and China are addressed with diplomacy and not military conflict which we are optimistic will be the case. If so, the market should return on its upward path retracing the ground lost in the first half with some surprising new market leaders.

As a Total Return manager taking a conviction approach to buying ownership interests in companies, we seek growth at a reasonable price. We continue to adhere to our investment discipline that has proven itself over time so that we rely on it in our process to remove emotion and be guided by process. We thank you for your continued confidence. We are on watch and will take corrective action to your best advantage.